How you can earn 14% in the 10% M-Akiba Bond
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
01 September 2019
[*NB: There is an error in these calculations. A correction is published in next article.]
The National Treasury
has re-opened the M-Akiba Bond for the third time. Investors have up to
Friday 6th September 2019 to buy the re-opened bond as a
primary issue. After that date, M-Akiba will move into secondary trading
where buyers and sellers will now incur transaction commissions.
M-Akiba is probably
the best investment available in our financial markets at the moment. It
offers a very high rate of return and comes with a guaranteed exit
option through which the investor doesn’t loose the interest earned up
to transaction date.
Furthermore, it is
easy to invest in M-Akiba. You simply dial *889# on your Safaricom or
Airtel line and follow a few simple instructions.
In addition, as a
government of Kenya instrument, the investment is guaranteed – you
cannot lose your money. So, with all these advantages, how come people
haven’t, jammed the system with applications? The answer is simple: poor
publicity – but that is outside the scope of this column.
Even though the bond
has been re-opened at the moment, the mobile platform still has the
secondary trading option. If you choose this channel, you will incur
transaction commissions at 0.335 per cent of the transaction amount.
The question then is:
should you buy in the re-open primary or in the secondary market?
Suppose you want to invest the minimum amount of Sh3,000. At the time of
writing (Wednesday 28th August) the total cost (including
accrued interest and commission) was Sh3,126.54.
After paying this
amount, you would expect to receive Sh150 on each the following dates: 9th
September 2019, 9th March 2020 and 7th September
2020. That is, a total of Sh450 in slightly over one year – 377 days.
The return on the
investment is 450 divided by 3,126.54; that is, 14.39 per cent. Remember
that this is over a 377-day period, so, for proper comparisons it should
be annualised. We do that by simply dividing it by 377 and multiplying
the result by 365. The answer is 13.93 per cent.
When
you buy the bond in the primary re-open market, you will miss out on the
upcoming interest payment of 9th September 209. Thus, you
only get a total of Sh300 by the end of the bond period. Your rate of
return is the published 10 per cent per annum.
So, which market
would you choose? Of course, you’re better off buying in the secondary
market where, even though the cost is higher, the returns are much
better. I think it was a mistake to re-open the bond so near to the
interest payment date.
I suspect that
Treasury is aiming to raise money to pay the upcoming interests for
existing M-Akiba bond holders. However, sharp investors with float cash
will prefer to buy in the secondary market thus jeopardising the success
rate of the re-open.
So now we are left
with one important question: what would be the best time to re-open the
bond? That’s a story for another day.
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